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Argentina hit by double blow as US Supreme Court rejects appeal in fight over defaulted debt

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The Canadian Press | Story:
117266 -
Jun 16, 2014 / 3:20 pm

BUENOS AIRES, Argentina - Argentina suffered a stunning double defeat at the U.S. Supreme Court on Monday as the justices refused to consider its plea to extend a decade of litigation over defaulted debt. Argentine stocks plunged as economists, analysts and opposition politicians practically begged President Cristina Fernandez to comply.

In urging the court to hear its appeal, the South American nation's government had warned that being forced to pay off the bonds in full, plus interest, could provoke another catastrophic default.

There was no official word on whether Fernandez would comply with the U.S. courts, or would refuse to surrender to investment groups she has derisively called "vulture funds." She scheduled a national address for late Monday.

Argentina must now hand over $907 million to the plaintiffs in just 14 days or lose the ability to keep making payments through the U.S. financial system. That could mean defaulting on the vast majority of its other bondholders, who previously accepted lesser payments following Argentina's economic crisis of 2001.

The court rejected Argentina's appeal without comment, and then ruled 7-1 that bondholders could force Argentina to reveal where it owns property around the world. That could make it easier to collect on other debts that have gone unpaid since Argentina's economy collapsed.

Justice Antonin Scalia wrote that U.S. federal law offers no shield to Argentina's assets. Justice Ruth Bader Ginsburg worried that this could expose even its embassies and military ships to seizure if the government doesn't pay.

"This is the end of the line for Argentina in the judicial appeal process. It has nowhere else to turn," said Richard Samp, a lawyer for the Washington Legal Foundation who lobbies for plaintiffs including NML Capital Ltd., the hedge fund owned by New York billionaire Paul Singer.

Argentina could win a delay of a few weeks by asking for a rehearing, but they are almost never granted.

Bowing to the U.S. court system would put Fernandez in a tough political position, forcing her to betray a core policy that Argentina must maintain its sovereignty and economic independence at any cost. Paying off the lawsuit winners also would encourage a long line of other creditors to seek similar treatment. Her advisers fear their demands could not be met without either draining the country's remaining reserves or sacrificing the subsidies and populist programs that enabled her to win re-election by a landslide.

But while refusing to comply likely would win applause from her supporters, it could send the fragile economy into free-fall.

Argentina's Merval stock index dropped 11 per cent after the court decision, its largest one-day loss in more than six months. Share prices for the state-run YPF energy company fell nearly 13 per cent, while the Edenor electricity utility plummeted 20 per cent. Argentina's country risk, as measured by the J.P. Morgan EMBI+ Index, rose nearly 10 basis points, reflecting a much higher fear that the government may refuse to pay.

Refusing was one of the options secretly outlined to Fernandez by Cleary, Gottlieb, the U.S. law firm that represented Argentina in Washington. The firm said her "best option" was to default first, then negotiate with creditors. The guidance leaked out just before the justices met, and the firm's lawyers were forced to acknowledge their authorship before the trial judge, Thomas Griesa.

Griesa's orders now stand: Argentina must begin paying NML Capital Ltd. $1.3 billion plus interest before U.S. banks will be allowed to process its next payments to other bondholders, due June 30.

Fernandez said the "vulture funds" represent about 1 per cent of Argentina's bondholders. An additional 6 per cent are awaiting payment on their defaulted bonds. But investors holding more than 92 per cent of Argentina's defaulted debt agreed in 2005 and 2010 to write off two-thirds of their pre-crisis value, providing debt relief that enabled Argentina's economy to rebound.

Argentina told the Supreme Court that forcing it to fully pay those who didn't accept bond swaps would cut the country's remaining reserves in half, destabilizing its economy.

The global economy also is at stake, Argentina argued, because forcing payment in full to holdouts removes incentives for investors to provide debt relief and condemns countries in crisis to sacrifice the poor to first pay the wealthy.

Economist Ramiro Castineira with the Econometrica firm in Buenos Aires described a narrow path Fernandez can take to avoid calamity.

"The country has sufficient reserves and if it shows a willingness to pay it will get financing, I have no doubts," Castineira told The Associated Press. "U.S. investment banks have already offered to buy Argentina's debt for about $5 billion in this scenario." That would provide enough liquidity to pay the remaining holdouts without using up Argentina's foreign reserves, he said.

The unpaid debt remaining from Argentina's historic $100 billion default in 2001 totals about $16 billion, which is roughly equal to just three points of GDP. That's a very low burden compared to many other countries, he said.

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